May 10, 2011 7:10 pm

Skype price raises fears of new tech bubble

The $8.5bn pricetag for Skype is eye-watering on many metrics. It is 32 times its adjusted earnings before interest, tax, depreciation and amortisation. It is also nearly three times the price – $3.1bn – that Ebay paid for the company in 2005. All this for a company that made a $7m loss last year.

Coming shortly after the announcement that LinkedIn – the business networking site which has only recently broken even – was targeting a $3.3bn initial public offering, it has raised fears of yet another tech valuation bubble.

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“We are seeing deals that are getting done at premiums reminiscent of the previous tech bubble,” said Paul Guely, managing partner at Arma Partners, the technology advisory company. “But it is not at unsustainable levels – yet.”

Social media companies with huge user numbers but unproven business models have seen the highest valuations.

Facebook, which has 600m active users, is valued in secondary markets at $65bn, 32 times its estimated 2010 sales. Renren, the Chinese social network with 31m active monthly users, listed on Nasdaq this month valued at $6.7bn, 90 times last year’s sales.

Fred Huet, managing director of Greenwich Consulting, an international telecoms and media consultancy, said it was difficult to value social media companies accurately, as they are bought for their strategic potential.

“People don’t know what the end game will be for these companies, and how they should value them for the long term. Companies like Facebook are reporting record advertising metrics, but no one really knows what all those ads are worth,” Mr Huet said.

Industry analysts said prices were being inflated by private equity companies chasing a relatively small number of technology targets. At the same time, established technology groups are having to pay high prices for newer businesses that will help enhance their own.

Companies like Intel, Microsoft and Nokia have really been left behind in the social internet space and are now having to make these kinds of investments to catch up,” said Ben Wood, analyst at consultancy CCS Insight. , a communications consultancy.

However, big writedowns might be the result of this, as in the case of AOL. The media group bought the Bebo social network in 2008 for $850m and sold it two years later for about $10m.

Similarly, News Corp bought the MySpace social network in 2005 for $580m, but is now looking to sell it for about $50m.

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